Problem: Clients are concerned that changes to child benefit rules due this autumn will see them lose out. Are there any possible ways to offset the changes to the child benefit rules?
The Finance Act 2012 made changes to child benefit with the introduction of the High Income Child Benefit charge.
Child benefit remains a universal benefit. However, if someone:
receives income of more than £50,000, and lives with a partner, in a household where child benefit is claimed or claims themselves, and
is the partner with the highest income, then they will incur a tax charge which removes or partially removes the benefit of receiving Child Benefit.
The measure of income is “adjusted net income” which is currently used to work out entitlement to personal allowances. Adjusted net income is, broadly, taxable income (it should be noted that this includes all rental income, full amount of bond gains and any other taxable income).
Certain deductions are allowed such as the gross value of personal (relief at source) pension contributions, gift aid and trading losses.
For those with adjusted net income between £50,000 and £60,000, the charge will be 1 per cent of the total benefit for every £100 of income over £50,000. The charge applies to the partner with the highest income regardless of who actually receives child benefit.
If a taxpayer or their partner has income of £50,000 or more on the 7 January 2013 and receives child benefit, they will be affected.
Taxpayers with income over £50,000 will be contacted in the autumn of 2012.
Tax charges for 2012/13 will not be payable until 2013/14. The amount of the charge will be collected through self-assessment or PAYE.
The recipient of child benefit may decide not to receive payments which would mean that they or their partner will not be liable to the tax charge. However, claims should be completed for new children born so that entitlement to National Insurance credits is not lost.
The definition of partner includes those married, in civil partnerships or couples living together as if married or civil partners.
The full impact of the changes will not be felt until 2013/14 as the tax charge for 2012/13 only applies to the benefit entitlement that arises after 7 January 2003.
Case study assumes charge on full annual amount of child benefit.
Case Study 1 – Earnings
Mr and Mrs A have three children under the age of 16. Mrs A claims the child benefit and receives £20.30 per week for the eldest child and £13.40 each for the second and third child. Mrs A does not work.
Mr A earns £48,000 and has also received a bonus of £5,000.
Total adjusted net income = £53,000
Total child benefit claimed = £1,055.60 for the eldest child and £696.80 for the other two children = £2449.20
Mrs A will still receive the child benefit of £2,449.20. However, Mr A will suffer the tax charge of £734.76.
How can this charge be mitigated?
If Mr A makes a net pension contribution of £2,400, this would be grossed up to £3,000. This £3,000 is deducted from the taxable income, leaving an adjusted net income of £50,000. This would mean that there is no tax charge to pay. He would then be able to claim another £600 back as higher-rate relief applies. Therefore, the pension contribution would actually cost £1,800.
The total tax saving is £1,200 plus £734.76 = £1,934.76.
So, the effective rate of tax relief is 64.49 per cent.
Clare Moffat is techical manager at Prudential